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Monetary Policy

Monetary Policy is a macroeconomic
policy laid down by the Central Bank. It refers to the use of instruments under
control of the Central Bank to regulate the availability, cost, credit and use
of money. It involves management of money supply and interest rate and is the
demand side economic

policy used by the Government of a country to achieve
macroeconomic objectives like consumption, growth, inflation and liquidity.

Objectives:

To achieve specific economic objectives,
such as low and stable inflation and promoting growth. Main objectives are -

Financial Stability

Maintaining price stability

Ensuring adequate flow of credit to
the productive sectors of the economy to support economic growth;

Repo Rate –
Repo rate is the rate of interest at which RBI lends money to commercial banks
in the event of any Short-term loans. This rate is used by RBI to control
inflation.

Reverse Repo Rate – Reverse Repo Rate is exact opposite of Repo Rate. It is the rate of
interest at which RBI borrows money from commercial bank within the country. It
is the monetary policy indirect instrument which can be used to control the
money supply in the country.

Bank Rate –
Bank Rate is the rate at which the RBI is ready to buy or rediscount bills of exchange
or other commercial papers. Bank Rate is also referred to as the discount rate.

Cash Reverse Ratio (CRR) – Cash
Reverse Ratio is the ratio of bank’s cash reserve balances with RBI with
reference to the bank’s net demand and time liabilities to ensure the liquidity
and solvency of the scheduled banks. It is a specified minimum fraction of the total deposits of customers.

Statutory Liquidity Ratio (SLR) – Statutory Liquidity Ratio is term used in the regulation
of banking in India. It is the amount a commercial bank needs to maintain in
the form of cash or gold or government approved securities (Bonds), balance in
currents account with other commercial bank.

Marginal Standing Facility (MSF) – Marginal Standing Facility is a window for banks to borrow from the Reserve Bank of India in an emergency situation when
inter-bank liquidity dries up completely.